Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows

Abstract

As red tape in host countries and information asymmetries constitute a significant obstacle to investment flows across international borders, an important policy question is: what can aspiring FDI destinations do to reduce such barriers? This study uses newly collected data on 124 countries to examine the effects of investment promotion on inflows of US FDI. We test whether sectors explicitly targeted by investment promotion agencies in their efforts to attract FDI receive more investment in the post-targeting period, relative to the pre-targeting period and non-targeted sectors. The results of our analysis are consistent with investment promotion leading to higher FDI flows to countries in which red tape and information asymmetries are likely to be severe. The data suggest that investment promotion works in developing countries but not in industrialized economies.

The Effect of Investment Promotion on Foreign Direct Investment Inflow into Ghana

“…The key variable, GIPC is not statistically distinguishable from zero. The statistical insignificance is in disagreement with the findings of Harding and Javorcikr (2007) and Harding and Javorcik (2011).…”

“…This means the transformation of the investment institution into GIPC has not had a significant singular contribution to FDI inflow into Ghana. This is contrary to the findings of Morisset (2003), Harding and Javorcikr (2007) and Harding and Javorcik (2011). The disagreement may be due to the coverage of data, whilst Morisset (2003) used data on survey for only 2001 across 58 countries, the current paper examined a time series model for a country, Ghana.…”

“…The latter strategy will require IPAs staff to participate in many different types of fairs and promote the country as a good place to do business. On the contrary, targeting, which investment promotion practitioners believe to be a better strategy (Harding & Javorcik, 2011) requires participation in fairs that are specific to the industries it targeted. Additionally, the IPA emphasises why its country is an ideal location for investors operating in the targeted areas.…”

Government Incentives and FDI inflow into R&D – The Case of Visegrad Countries

“…Investment promotion practitioners believe that the most effective way of attracting FDI is to focus on a few priority sectors (target sectors) rather than attempting | 83 to attract all types of foreign investors. The idea behind targeting is that a more focused message tailored and delivered to a narrow audience will be more effective than general investment promotion activities (Harding & Javorcik, 2011, p. 1450.…”

“…The purpose of investment promotion is to reduce transaction costs facing foreign investors by providing information (on business opportunities, prevailing laws and regulations as well as factor cost in a host country) and helping foreign investors deal with bureaucratic procedures (Harding & Javorcik, 2011, p. 1445. Investment promotion agencies to a large extent are responsible for encouraging and promoting its countries in the international arena of capital flow.…”